Cliffs Natural Resources announced yesterday it would acquire the Ring of Fire chromite properties of Freewest Resources Canada. Cliffs would own 100% of two deposit sites, Black Thor and Black Label and 50% of the Big Daddy site located in Northern Ontario. Cliffs not only intends to mine chromite ore, but also process 400,000-800,000 tons annually of ferrochrome, a key steel-making raw material (particularly for stainless steel) on the North Shore of Lake Superior, according to a web-cast presented yesterday. According to Cliffs, they believe they have an extremely competitive cost structure due to the open pit mines (vs. underground), thickness, grades and quality of the deposit. With current prices of ferrochrome in the $.82-.88/lb (though we have seen current pricing in the $.90/lb range), Cliffs felt confident that they could compete on the “low end of the cost curve at current market prices (ferrochrome peaked last year at $1.75/lb).
As we have previously reported, South Africa supplies 45% of the world’s production of ferrochrome. Power outages have created concerns among steel makers according to Cliffs’ own market research. Several analysts on the web-cast asked questions around key variables including power, logistics, cost and risk. In terms of power, a dam providing power nearby the proposed smelting facility site on the Albany River should provide ample power capacity. Though the St. Lawrence Seaway presents logistics challenges from a cost perspective (tough to ship bulk freight products such as iron ore cost competitively), ferrochrome, with it’s higher sales price (on a pound basis) and smaller volumes would allow Cliffs to ship cost effectively. Though good rail options exist, Cliffs will need to identify how it can obtain a rail connection from the smelting facility.
In terms of risk, the approximate investment, according to Cliffs will total approximately $800m with 2013 and 2014 representing the biggest investment years. The facility would come on-line in 2015. The quality of the deposit, according to Cliffs “is similar to South Africa. Global consumption for ferrochrome in 2008 totaled 7m tons. Europe and North America had a 1.8m-ton deficit with all supply coming from imports. According to Panjiva, the US took in 38 shipments (we couldn’t identify the tonnages of the shipments) of ferrochrome in October, up from 6 at the low point of 2009 back in February and March from a range of countries led by Sweden, Germany, Luxembourg and Russia.
Cliffs stands to add $640m 1.28b to its existing $2.5+b in revenues based on a market price of $.80/lb. We had previously reported that higher cost producers have a $1.00/lb price minimum to hit marginal rates of production. Cliffs indicated at current price levels it could compete. Let’s hope so. A viable domestic option will help steelmakers and in turn, steel and stainless steel buyers.